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May 13, 2008

FT: Google triumphant: Search wars look settled

Google triumphant: Search wars look settled

By Richard Waters in San Francisco

Published: May 12 2008 19:54 | Last updated: May 12 2008 19:54

Eric Schmidt was doing his level best late last week not to gloat. With Microsoft dropping its attempted takeover of Yahoo, the Google
chief executive had just seen his arch-rival abandon its most direct
attack yet on Google’s growing dominance of online search and
advertising.

“I’m
happy to be crowned winner,” Mr Schmidt said, before quickly adding:
“But as we’ve learned in the election cycle, it goes back and forth.”

The
political analogy may have been ill-judged. Like Hillary Clinton after
last week’s primary results, Microsoft has never looked more on the
defensive. For a company that has always scorned the idea of big
mergers in the past, the pursuit of Yahoo was the clearest admission
yet that the software company was running out of options as it tried to
counter the rise of Google.

“The failure of the Microsoft/Yahoo
merger eliminates the biggest short-term threat” to Google’s unrivalled
position on the web, says David Yoffie, a professor at Harvard Business
School. For now, its momentum “seems unstoppable”. Michael Cusumano, a
management professor at Massachusetts Institute of Technology,
describes Google’s now-unchallenged dominance even more bluntly:
“They’re sitting on a goldmine.”

The scale of Google’s victory
over Microsoft in online advertising, sealed by the failure of the
Yahoo takeover approach, is hard to exaggerate. By next year, half of
the world’s online advertising – set to reach $55bn (£28bn, €36bn) in
total – is expected to flow through Google’s systems. Of that, slightly
more than two-thirds will come from advertisements that run on Google’s
own websites. The rest represents advertising that the internet
company, acting as a broker, places on other companies’ sites in return
for a small cut of the action.

It is a stunning victory that
raises two overriding questions. Will Google be able to use the respite
provided by the disarray at Microsoft and Yahoo to carry its dominance
of search over into other areas of online – and broader digital –
advertising? And should it now be a cause for alarm that one company is
in a position to control so much of the lifeblood of the internet?

To
some extent, the Microsoft/Yahoo debacle merely confirms something that
had already become apparent: the internet search wars ended almost as
soon as they began, and Google won. It accounted for around 70 per cent
of the estimated $16bn of advertising placed on search engines last
year, a share that continues to rise.

Microsoft and Yahoo were
late to see the danger, beginning their own search initiatives four to
five years ago. A merger would at least have created a second player
with the scale to try to compete, says Sir Martin Sorrell, chief
executive of WPP, the advertising group. Separately, the two now face
continued erosion, he adds. Sir Martin also takes issue with a
potential partnership with Yahoo, currently under discussion, that
would give Google an even bigger share of the search advertising
market.

The eventual limits of the fast-growing search market, which
accounts for almost half of all online advertising, are still
impossible to discern, but it is already a business that stands
comparison with the technology industry’s most fabled success stories.
On the current trajectory, Google’s revenue – almost all of it coming
from search – will probably surpass the income that Microsoft generates
from the Windows operating system some time next year.

There is
no guarantee that the search company will alight on another idea as
powerful as its advertising system, says Mark Anderson, a veteran
technology commentator. Yet that may not matter for some time, he and
most other industry insiders say. “I think it’s enough for the next 10
years,” says Mr Anderson. “When God gives you a golden goose, you have
to hold it tight.”

Google has spent much of the money from this
gilded fowl, and the time afforded it by the failure of its competitors
to mount a tougher challenge, preparing for what comes next. Through
the acquisitions of DoubleClick
and YouTube, it has placed big bets on display advertising and online
video. These deals have been the most visible part of its attempt to
stake out a position in some of the most promising new areas of digital
advertising, says Rishad Tobaccowala, a new media expert at Publicis,
the advertising and marketing group.

This is most evident in the video and mobile worlds. Through YouTube and its test of a digital advertising system with
EchoStar,
the satellite television company, Google has put itself in a position
to catch the wave of traditional television advertising as it moves to
the web.

In mobile, meanwhile, Google has spent a frenetic year
preparing the ground for what it claims will be a bigger business than
even its current PC-based one. That has included fighting to open up
part of the mobile spectrum in the US so that users get guaranteed
access to its services, investing $500m in a high-speed WiMax network,
grabbing a prime spot for its services on Apple’s iPhone and launching
its own mobile technology platform, known as Android. “They have
understood better, they have positioned themselves better, for where
the world is going than anyone else,” says Mr Tobaccowala.

This
does not mean that success is guaranteed. “The best technology doesn’t
always win,” says Prof Yoffie. “History is littered with better
technologies that have been left by the wayside.”

The biggest
danger may well be that fear of Google’s growing power will prompt a
backlash from the very companies it will need on its side as it tries
to expand out of search. “The mobile carriers are very concerned about
letting Google dominate advertising on mobiles the way it has on the
PC,” says Prof Yoffie. That echoes the earlier struggles of another
tech industry giant: Microsoft found it hard to break into the mobile
industry for similar reasons, while the traditional media industry kept
the software company at arm’s length for years after the arrival of the
internet out of fear that it would become a gatekeeper with the power
to intercede between media companies and their customers.

The
parallels with Microsoft are compelling and help to explain why Google
is becoming widely feared, says one person who has worked closely with
Google for a number of years. Microsoft used its dominance of computer
operating systems to build a second market in software applications,
eventually dominating that market too.

“These days, the
applications are newspapers and television and video games and
communication devices,” this person says. According to this view, as
these information services are digitised and move to the internet,
Google’s advertising system will become the financial platform on which
many of these businesses depend – in much the way that Microsoft’s
operating system became the backbone for the technology ecosystem of
the PC.

Despite the
discomfort this causes, however, Google’s status as the internet’s most
effective money-maker makes it hard to ignore. That helps to explain
Yahoo’s plan to cast itself as a more trustworthy ally of other
internet companies – and why many will be hoping it recovers to become
a stronger competitor to Google.

So if Google is about to enter a
golden age that rivals the heyday of Microsoft on the PC or IBM on the
mainframe computer, should this be a cause for concern? Both of those
technology companies were criticised in their industry for growing so
powerful that they eventually squashed innovation, drawing the
attention of antitrust regulators. Does a similar fate await the young
idealists who have vowed “Don’t do evil” with their search engine?

The
case against a dominant Google is summed up by Sir Martinof WPP.
Without the prospect of a strong rival that would have been created by
a combination of Microsoft and Yahoo, advertisers could be left with
little choice, he warns.

For their part, Google executives make a number of claims for
why their particular corner of the advertising business is not
susceptible to monopolisation – and why bringing even more advertising
into their system should actually help customers.

“What we’ve
seen in the past when we’ve done substantial expansions of our network,
advertisers have really benefited, they’ve been really happy to be able
to get increased reach for their targeted ads,” says Sergey Brin, one
of Google’s founders. “For them it just means more sales with clear and
accountable profit margins,”

Larry Page, his co-founder, adds
that since Google merely runs an auction in which advertisers bid
against each other, rather than actually setting the prices for
advertising placed on its sites, it cannot affect pricing. “In general
having more inventory available to advertisers is very positive for
them – they have one powerful interface where they can bid on one type
of advertising and have that against as wide a range of inventory as
possible,” he says.

Yet this heavy focus on the financial
efficiency of Google’s brand of online advertising ignores the fact
that many customers want more choice in the types of advertising they
use and more ability to negotiate unique ways to present their message,
says Prof Yoffie. “Google doesn’t have the reputation for being the
easiest company to deal with, and with less competition it will be even
less easy,” he adds.

That will not matter as long as advertisers
are able to switch their business to other online advertising networks,
counters Mr Schmidt. “Advertisers always have multiple choices so it
always makes sense for them to use more than one,” he says. “It is
incorrect to assert that there’s lock-in or an opportunity for
dominance in the advertising space.”

Switching between
advertising suppliers in a market as concentrated as internet search
may not be as simple as this suggests, though. Big advertisers that
want to buy a large volume of “clicks” a week may find that other
search engines cannot guarantee them the volume they need, says Sandeep
Aggarwal, an analyst at Collins Stewart in San Francisco.

Also,
the cost of building the technology to connect with Google and learning
how to get the best out of its search system means that many of its
customers have made a big investment, says Prof Yoffie. “There are real
switching costs,” he adds.

Even some of Google’s admirers agree
that the limited choice in search – and, potentially, other areas of
digital advertising – does not sit well with customers. “Generally,
advertisers like to have four or five suppliers in a market,” says Mr
Tobaccowala.

The argument for overlooking this, he adds, is that
most big advertisers direct only a very small percentage of their
budgets to search – and besides, the upheaval under way on the internet
is so great that any lopsidedness in a particular part of the industry
may well prove insignificant in the long run. “With all that change,
I’m less concerned about one company climbing on the others,” Mr
Tobaccowala says.

That is certainly how Google’s leaders see it.
The search company and its rivals are racing to invent the future of
advertising, says Mr Page, and this rapid innovation is by far the
dominant force in shaping the competitive landscape.

If Google
tries to rub salt into Microsoft’s wounds by pressing ahead with an
alliance of its own with Yahoo, it will get a chance to find out
whether regulators agree with this sanguine view.